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AER Advisors Inc. v. Fidelity Brokerage Services LLC

United States District Court, D. Massachusetts

August 22, 2018





         Plaintiffs AER Advisors Inc. (“AER”), William J. Deutsch, and Peter E. Deutsch bring this action against Fidelity Brokerage Services LLC (“Fidelity”), alleging that its unauthorized lending of the Deutsches' shares in China Medical Technologies Inc. (“China Medical”), caused a market disruption in June 2012. To cover up its role in the market disruption, Fidelity allegedly implicated Plaintiffs in a false Suspicious Activity Report (“SAR”), filed with the government. As a result of the SAR, Plaintiffs claim they were subject to investigations by various state and federal securities-related agencies.

         On November 8, 2017, the United States District Court for the Southern District of Florida ordered that the case be transferred to this Court. See Docket No. 40. One month later, Plaintiffs filed their Second Amended Complaint (“SAC”) (Docket No. 64), asserting 13 causes of action, all of which are primarily based on the SAR. The claims are for negligent reporting (Counts I and II), tortious interference with existing business relationships (Count III), tortious interference with prospective business relationships (Count IV), breach of contract and the covenant of good faith and fair dealing (Counts V and VI), promissory estoppel (Count VII), breach of fiduciary duty (Count VIII), unjust enrichment (Count IX), negligence or gross negligence (Count X), deceptive and unfair trade practices (Counts XI and XII), and prima facie tort (Count XIII).

         Fidelity moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), arguing first that it enjoys absolute immunity from liability for any SAR filed. Second, Fidelity maintains that any claims predicated on its alleged unlawful lending of the Deutsches' shares must be dismissed under the doctrine of claim preclusion. Finally, Fidelity argues that AER's claim for tortious interference with existing business relationships is barred by the statute of limitations.

         After a hearing, the Court ALLOWS Fidelity's motion to dismiss (Docket No. 66).


         The following factual background comes from Plaintiffs' SAC. Plaintiffs' factual allegations must be accepted as true at this stage of the litigation. See Foley v. Wells Fargo Bank, N.A., 772 F.3d 63, 71 (1st Cir. 2014).

         I. The Parties

         AER, a registered investment advisor, served clients nationwide with “discretionary investment management services.” SAC ¶ 17. AER joined Fidelity's Wealth Central platform in 2009 and exclusively relied on that platform to provide its investment services to clients. SAC ¶¶ 18-19. Fidelity promised to assist AER with business development and growth. SAC ¶ 21. In reliance on that promise, AER actively solicited business from clients nationwide. SAC ¶ 21. In 2011, AER introduced the “China Gold” investment strategy and decided to make the strategy the focus of its business model. SAC ¶¶ 22, 111. The China Gold strategy was based on the expectation that the anomalously low prices at which some Chinese securities were trading would “trigger a management buy-out or another privately driven exit transaction (e.g., a strategic acquisition).” SAC ¶ 22. Fidelity supported China Gold and incorporated the strategy into its own investing. SAC ¶ 23.

         William Deutsch is the Chairman of Deutsch Family Wine & Spirits, and Peter Deutsch serves as the company's Chief Executive Officer. SAC ¶¶ 8-9. The Deutsches were clients of Fidelity's Family Office Services (“FFOS”), and eventually participated in AER's China Gold strategy. SAC ¶¶ 25-26. When Peter Deutsch decided to join FFOS in November 2011, he accepted Fidelity's service proposal, which offered him “seamless and flawless” strategy execution, institutional-quality brokerage services, and a “client first, ” “conflict-free environment.” SAC ¶¶ 27-28. Peter Deutsch relied on Fidelity's promises about the services it would provide. SAC ¶ 28.

         II. The China Medical Investment and Market Disruption

         After Peter Deutsch joined FFOS, the Deutsches decided to accumulate a large number of shares of China Medical, gain control of the company, and sell it to a buyer or private equity firm. See SAC ¶¶ 29-30. Peter Deutsch began acquiring China Medical shares through his FFOS account in December 2011. SAC ¶ 33. By February 28, 2012, the Deutsches owned nearly 4.4 million shares of the company. SAC ¶ 34. They had purchased around 8.6 million additional shares by June 30, 2012. SAC ¶ 34.

         Fidelity emailed AER on March 5, 2012, with an offer for the Deutsches to join its “fully paid lending program” for their China Medical shares. SAC ¶ 35. In the email, Fidelity represented that its “securities lending desk in Capital Markets [was] paying a 5% rate . . . for these hard to borrow shares.” SAC ¶ 35. The email also acknowledged that there was “a 100% requirement to hold this position” and that a “service agreement [would] need to be signed by the end client to enter into this program.” SAC ¶ 35. If the Deutsches had accepted Fidelity's offer, they would have been in a good position to accomplish a short squeeze.[1] See SAC ¶ 36. However, AER replied to Fidelity's offer with a straightforward rejection: “Client is not interested in lending stock.” SAC ¶ 37. After receiving AER's email, Fidelity never advised the Deutsches that they should move their shares and trade in a cash account, as required by Fidelity's internal policy. SAC ¶ 39.

         Despite the fact that Fidelity had not received consent to lend, between May and early June of 2012, the company lent nearly 1.8 million of the Deutsches' China Medical shares to short sellers or their brokers. SAC ¶ 41. Fidelity made money from these loans, but the Deutsches were not notified of the lending, were not paid any compensation for the loans, and did not receive any collateral. SAC ¶ 42. When AER asked Fidelity whether it had lent the Deutsches' stock without their authorization, Fidelity responded that it could not disclose that information. See SAC ¶ 49. Peter Deutsch was also told by Amanda Topping at FFOS that the portion of China Medical stocks that Fidelity could lend out from his account was “very small.” SAC ¶ 50.

         The wine turned to vinegar in June 2012. On June 11, 2012, after “a routine monthly transfer of [China Medical] shares between the Deutsches' margin accounts, ” Fidelity's lending triggered a recall obligation. SAC ¶¶ 45-46. The company then issued a recall for about 1.5 million shares on June 13, 2012, eventually recalling approximately 1.8 million shares over the next few days. SAC ¶ 46. The Senior Vice President and head of the Securities Lending Desk of Fidelity Capital Markets, Ugyen Sass, anticipated a short squeeze due to the company's loans and failed recalls on June 15, 2012. SAC ¶ 46. Then, on June 18, 2012, Fidelity issued its final batch of recalls. SAC ¶ 46. Because the recalls failed, Fidelity bought roughly 1.2 million shares of China Medical on the open market between June 19 and June 27, 2012. SAC ¶ 46. The price of the stock increased from $4.00 per share on June 13, 2012, to $11.80 per share on June 29, 2012. SAC ¶ 46.

         On June 29, 2012, the Securities and Exchange Commission (“SEC”) halted the trading of China Medical. See SAC ¶ 46.[2]

         III. The SAR and the ...

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